In technical analysis indicators for coin trading, the Fibonacci sequence is used by many investors. This is an indicator based on a mathematical formula from the 12th century, which helps traders identify potential support and resistance levels. Learn now with Crypto Trading about the content related to the indicator as well as how to apply it to trading.
What is the Fibonacci sequence?
Sequence Fibonacci numbers are an infinite sequence of natural numbers that starts with two numbers 0 and 1. Then, each number after that will be created from the sum of the two numbers before. Thus, we have the Fibonacci sequence specifically 0,1,1,2,3,5…
Fibonacci formula:
F(0) = 0
F(1) = 1
F(n) = F(n-1) + F(n-2)
This number sequence was discovered in the 12th century by mathematician Leonardo Fibonacci. According to Fibonacci theory, after having statistics of the number sequence, we proceed to divide the numbers in the sequence together to get the corresponding ratios: 16.18%, 23.6%, 38.2%, 61.8%. These are extremely useful trading parameters in Crypto, forex, and stock trading…
Like the golden ratio, the Fibonacci sequence is not a random synthesis but its author discovered it as a wonderful law of creation:
- The number of petals is always a Fibonacci pattern number!
- The number of spirals (in sunflowers, in pine nuts, in spiral staircases, in pineapples) are all numbers in the Fibonacci sequence!
- The number of leaves growing from the trunk, and the number of new shoots growing in each growth period, all fall within the Fibonacci formula!
Meaning of Fibonacci formula
The Fibonacci sequenceis considered an important indicator in the technical analysis of coin trading. Through research, investors have discovered that the ratios obtained from dividing the numbers in Fibonacci are potential resistance and support points. Among many ratios, the levels of 61.8%, 38.2%, 23.6%, and 50% are important levels for trading.
Fibonacci sequence can help traders predict the levels that will appear in a moving price trend. It can show the market’s reversal point and help investors predict a possible continuation scenario. From there, it will also be possible to determine resistance, support, target price zones, and appropriate stop-loss levels. And those are the 4 important factors for a position!
See more: Fibonacci: magic trading tool for every trader
3 types of Fibonacci patterns commonly used in coin trading
For technical analysts, the Fibonacci formula is a great choice for building a trading strategy. Depending on the signal provided, Fibonacci will be divided into 3 corresponding types:
Fibonacci retracement
The Fibonacci sequence is called Fibonacci Retracement. This pattern is a horizontal line that tells us where support and resistance are likely to occur. Usually after a strong price increase or decrease, the Fibonacci retracement formula will appear. Each retracement price level will be located by a corresponding percentage of the Fibonacci sequence. Specifically, the levels of 38.2%, 61.8%, and 78.6%.
All retracement levels are static, not like moving averages. Accordingly, after the price moves up, it will have a retracement of 61.8%. After the price moves down, it will have a retracement of 38.2%. After this retracement, the price will continue to increase or decrease according to the old trend. Therefore, investors can place orders and stop losses at these retracement levels to be safest.
Fibonacci sequence extended time form
The Fibonacci sequence in the form of an extension is called Fibonacci Time Extension. This is again a set of vertical lines and the value of each line will be a Fibonacci number (not a ratio like Fibonacci retracement).
Accordingly, at these Fibonacci levels, the price will have a significant change in trend. Either it will continue more strongly, or it will reverse. In which, the reversal trend will appear more often but the overall trend will be continuation.
Therefore, this extended time Fibonacci level is effective for traders to determine long-term price trends. At the same time, it is also useful for short-term trading at Fibonacci points where prices reverse.
Fibonacci sequence fan shape
Fibonacci Fan – The Fibonacci Fan – is a set of 3 diagonal lines drawn from bottom to top (in an uptrend) and from top to bottom (in a downtrend).
These lines will move by the ratio levels of the Fibonacci sequence. The corresponding parameters are 38.2%, 61.8%, and 50% (middle line). And these are the next support and resistance levels that the price can reach.
What are the applications of the Fibonacci formula?
From the Fibonacci levels as well as its forms, you must have understood what the application of the Fibonacci sequence is.
Through the numbers in the sequence as well as the ratios created from them, investors can use Fibonacci to:
- Identify potential resistance and support levels on the price chart with near-accuracy. These levels will indicate where the trend is reversing and traders can place buy or sell orders accordingly.
- Predict potential price levels where the asset will correct. During the move, the price may hit Fibonacci ratio levels and these are important entry points.
- Identify potential buy and sell points as well as safe stop loss points.
- Identifying short-term and long-term market cycles Fibonacci sequence with corresponding ratios will let traders know how price trends will operate in the future.
See more: MEXC: Open a MEXC account, invest effectively
Notes when using the Fibonacci sequence in trading
The magical Fibonacci sequence is not only a magical element of creation. It is also a great tool for technical analysts to trade coins. However, to optimize the benefits that the Fibonacci sequence brings, traders need to note:
- Use the Fibonacci pattern in combination with other tools such as MA, Trendlines, and some dynamic indicators. Fibonacci is a static indicator and combining it with some other indicators will help eliminate noise signals. Investors will have a more comprehensive view of price trends.
- Sometimes, Fibonacci ratios are not completely accurate. So traders also need to be flexible to consider it in each context. Look at the overall price trend and support and resistance points. From there, evaluate whether using the Fibonacci sequence is reasonable in this case.
- For inexperienced investors, using the Fibonacci sequence can be a risky venture. Risks may arise if you analyze them incorrectly. Therefore, practice trading with Fibonacci on a Demo account until you are proficient. Or see how professional traders trade before applying it to your strategy.
Conclude
Crypto Trading has provided some important information about the Fibonacci sequence. It can be seen that this is an interesting technical tool. In any case, do not be too subjective because the Crypto market is constantly fluctuating. Support and resistance levels can change continuously. To accumulate more investment experience, read more advice and share other transactions with us!
FAQs
How to draw Fibonacci lines on a chart?
Traders will rely on time frames, tops, and bottoms in each wave. However, most trading platforms have automatic identification tools and you should take advantage of them.
Can the Fibonacci indicator be used alone?
Yes, but for better accuracy, you should combine other tools and indicators.
Is the Fibonacci formula effective in trend continuation or reversal?
Both. Investors often apply it for short-term trading in trend reversals and long-term holding in trend continuations.
